Nadella begins by saying how excited his is to be back in the space. Hes feeling young, and ready to show some innovations.

Any surprises coming up?
We’re working on the logic of bringing the engineering teams together, being able to make sure we do smart things for end users and advertisers. Overall from an organizational perspective, I think of Microsoft organizations as having a half life of a year. It’s about the team and their ability to fulfill users’ needs. Bringing them together was the right thing to do and the opportunity.

When you’re at 10% share in the US, that’s the challenge. Obviously you need a search engine to satisfy users’ needs. But to put it in a numeric perspective, look at the number of unique searches in a month. About a quarter of unique searchers/month are using Live—that’s our goal. We must “crack the code of engagement.” There are lots of people even trying Live search. The thing we want to do is how to get them to stay with us.

The MSN audience is our portal audience. We have to crack how search relates to the content on our portal. We have a list feature on MSN that’s very popular.

The other Live services, like Messenger, are integrated with search pretty well. It’s something we’ll continue to experiment with. What is the notion of shared search? Location-based search? Inserting map information into Outlook/Hotmail?

We want to exploit contextual search within our network. The Microsoft.com site just got a Live search bar. We want to take the 50 million searchers that we have and increase them.

How do you distinguish yourselves from Google, Yahoo and Ask? How do you shake it up?
One of the things that I like to think about is, being in the search game—will all things be commoditized over time? Sure. We’re investigating of our own platform. I feel we’ve finally reached a level of maturity where we can compete with the best, if you will. I read the New York Times article on Google, and I compared Live results with the Google examples from article. I think we did well.

There are a variety of ways we can go from here. It’s an important direction. There’s a full page beyond the intent of links. We’ve really increased coverage of it in the last year: weather, stocks, sports. Also related searches. We’ve got to go beyond full page relevance with new content types. Image search, and the scratch pad have gotten good feedback. Later today we’ll blog about it. Weâ’ve quickly responded to face recognition on search.

The 3D web is clearly a place where we have invested. We have 120 cities in 3D models & bird’s eye view. This will be great, in time, for a new ad type.

Mobile. We have a great app—Windows Mobile, as well as in broswers. Our synonym database is a great asset. We have a variety of horizontal and vertical integrations as well as our core investment.

Do you see either one of those as the stronger way people are going to go? We’ve had horizontal for years and it hasn’t taken off, but you’re setting the pace in 3D. Will that be your direction?
Clearly, that’s part of our strategy. I think images and video will become pretty mainstream. At the same time we’re not in just to win or get our fair share in just the verticals.

How â€˜bout on the advertising side?
On the advertising side. adCenter, we got it out last year. We’ve been in for a year, so we’re pretty happy with that. Based on audience feedback, we’re looking at quality and usability. Our last update had a lot of innovation, things that updated those issues—to be able to do campaign uploads, management, and put a lot of emphasis on basic usability.

Beyond that, one of the things that we started doing—contextual ads on our network. It’s in a pilot program now, yielding pretty good results for us. The center is search. It’s one of the ways that we’ll solve the traffic that our advertisers expect.

Also see adlab.microsoft.com (their keyword tools received good reviews on the next day’s Better Ways panel). It’s a keyword services platform, taking all keyword intelligence that we have: forecasting, extraction, etc. We’re exposing that as a set of web services to search engine marketing folks. Again, in pilot.

The other thing we want to do a lot is support new ad types. Infinite zoom capability, client capabilities—how to introduce new ad types.

The aQuantive acquisition: Why pay so much money for something you could have built yourself?
We’re going to keep at it. If you think of the aQuantive deal, of all the things that we could have done, this is most complimentary when it comes to assets. Publishers are an area we wanted to expand into.

How can you own an SEM firm or will you have to spin them off?
We intend to make no changes to that arrangement. aQuantive had a tech business as well as an agency. They were able to remain separate and flexible. Clearly, we’ll take that leadership and maintain it and not change. There’ll be a different lens with MSN involved.

At some level, the idea of having a fast feedback (constantly) while servicing an agency was not lost on us. aQuantive felt it was key to their success. We want to build on that.

It’s as if the New York Times that has its own PR company to get others companies into the New York Times. People wouldn’t want to trust them.
It all comes down to what are some of the policies governing how they function. We want to keep Avenue A as a very neutral agency. Avenue A will have all the right policies within.

Let’s talk about Steve Berkowitz. He’s marketing, you’re engineering. How close are you?
Steve runs the business. I have the responsibility to run the engineering of the P&L. I’ve gotten to know him and we have a good rhythm of how we manage our business. At some level I look forward to our association.

Steven runs the Online Services Business. We all work together

First there was the shift toward Windows Live. Now it’s kind of back to MSN. It’s been back and forth. Will we see a real resurgence of MSN?
Overall, I think at the end of the day, MSN is our portal, where our traffic is. There should be no confusion in terms of our entire destiny and ability to make headway in search—it depends on keeping pace with MSN as a portal—search, Messenger, Hotmail.

You’ll see us innovate with these services. We want them to use MSN as the brand & destination. I’m sure other people are working on the clarity.

How do you prepare yourself for this job?
As you change from one area to another, I’ve probably worked in every part of our business. There’s always the thrill of getting to a new domain and a new audience. Thinking about an expert crowd [before starting this venture]—I think all my fears will come true. The best way to energize myself is to jump into something new. The last month has been refreshing, meeting a new set of people, challenges. At the end of the day my job is about the great people that we have all over the globe & to be able to enable them to do their work. We have some very smart and capable folks. My job is to be able to take out friction and enable our team to do their best work.

Audience Questions

What are the main things you want to be doing over the next year? Five years?
We want to show some innovation that stands up to increase engagement. The crux is how to take searchers already using Live search and get them to use it more. We want to look at abandonment rates, be scientific and data driven about that.

I think one of the great opportunities we have is in MSN where we know the audience & search—nformation supply—can be done in a lot more contextual way. A lot more contextual search innovation—”convenience search” (as Berkowitz calls it).

The longer term: is the best sort of search interface just query and results? Hey, queries are not done in isolation. They’re being done because of some sort of context or past. Personalization is one angle at it. That’s one place where I think that there’s a ton of innovation on the user experience side.

I know that you’ve offered your corporate customers discounts on products to use search. Can you extend that down to personal users?
I’ll take that back to my business colleagues.

I’m also curious about Amazon A9 that came back to MSN (the street view one).
We definitely believe in and are huge on 3D. But we did have street level innovation. We’re opting for the 3D oblique and birds eye view. MSN had its own street view (Danny: Let’s segue into the Google Street View controversy.) Privacy is about how much you put the user in control—making connections, disclosures.

I think the end users will vote. We experimented with a street-side view. In this case, I think user experience counts in terms of user adoption. We’re expanding that now.

Do you see a way of trying to do the control before it’s reported to you? Will we be able to block ourselves out?
This is one of my nightmares come true [referring to being asked the question, I think]. At the end of the day, I imagine that as you have control. Why do we treat government agencies differently? The benefit I’d raise is broadly outweighed by any privacy concerns, that would win out. If not, we’ll get to some sort of equilibrium.

In the last month, we’ve seen Google Universal search roll out. What’s your take and will Live go that way?Our answers—we introduced image search, news, stocks, sports answers—it’s a similar direction. We want to take advantage of full page real estate, enable tabless browsing of search results. Page architecture has developed & is evolving along those same lines. We believe in it and create a platform to allow third parties to potentially program in the answers. Directionally I believe in that and you’ve seen some progress in that area.

Are you committed to being compatible with Firefox? (3D maps are not.)
We definitely want to be everywhere the audience is, including Firefox, Safari/Mac.

Danny: Quick survey: How many use Firefox? (Like 95% raise their hands.) Please develop a product that works either way.
I think that the idea has registered with us, we’ll try harder. I think that demographically, you have a different skew than the general marketshare.

To influence people to spend more on ads, would you reward them with higher natural rankings?
That I believe will not be what users want. At the end of the day, we want to be able to innovate to get the audience. We want to make sure that the targeting of our ads, given our search volume, is perhaps where we have our hardest dialogue. We want to provide best quality SERP.

Comment: I’m impressed with improvement of AdCenter over last six months. Great customer service. Question: What do I tell my clients when they ask me “why should I use Live.com?”?
We could talk about all the things we believe are better. Image search I believe is differentiated. 3D, product search—selection, user experience. There is an aggregation of a lot of these features. Search is universal, every query is different, every user has a different need at a different time. Everyone uses Google, but lots use Live too. There are plenty of searchers using both (I suspect that’s true, too). Advertisers should be there for both. There’s innovation & competition and cross channel exposure.

When you look at the frequency with which we release stuff, the energy in the engineering team—I’m excited to be in this space & hope to be here a while.